There are many myths out there when it comes to tax depreciation, especially around what property investors can claim. Tax depreciation can benefit anyone with an investment property. It is about working out how much your investment property depreciates over time and claiming these values at tax time. A tax depreciation schedule is all about making your rental property work for you.
The experts at BMT Tax Depreciation help to ‘bust’ some common tax depreciation myths.
In this article we will look at the following myths:
- MYTH: My accountant will arrange this for me
- MYTH: You can only depreciate new properties
- MYTH: I have had my investment property for two years without a schedule in place so there’s no point now
- MYTH: It’s just more money to spend each year
- MYTH: I only have a small unit so there won’t be much to depreciate
- MYTH: Renovations were completed by the previous owner, so I can’t claim them
- MYTH: Once I have spent money on an asset or capital work, I can claim it
- MYTH: More expensive items get higher depreciation
- MYTH: All construction costs are eligible for depreciation
MYTH: My accountant will arrange this for me
BUSTED: Accountants, Real Estate Agents and Property Valuers are not allowed to estimate the cost of construction for properties built after 1985. The Australian Tax Office (ATO) has identified Quantity Surveyors as appropriately qualified to estimate the original construction costs in cases where that figure is unknown.
MYTH: You can only depreciate new properties
BUSTED: Older properties also depreciate. There are two types of depreciation an investor may be eligible to claim, plant and equipment assets for the easily removable fixtures and fittings and capital works deductions for the building structure. Investors can claim capital works deductions on properties where construction commenced after 15 September 1987. They may also be eligible to claim capital works deductions on any structural renovations which have occurred. Changes to depreciation rules announced in 2017 mean some investors may not be eligible to claim plant and equipment. However, these rules do not affect those investors who exchanged contracts prior to 7:30pm on 9 May 2017, owners of new residential properties or commercial property owners. Investors can also claim depreciation on assets they purchase and install themselves once the property is income producing. It is always worth contacting a Quantity Surveyor to discuss whether depreciation applies to your individual circumstances.
MYTH: I have had my investment property for two years without a schedule in place so there’s no point now
BUSTED: Not at all… You can still claim previous year’s depreciation; this is known as recouping missing deductions and can be done for up to two previous financial years.
MYTH: It’s just more money to spend each year
BUSTED: A tax depreciation schedule is valid for up to 40 years. The one-off fee is completely tax deductible.
MYTH: I only have a small unit so there won’t be much to depreciate
BUSTED: Even if you own a small unit or apartment, you may be able to claim part of the common area as well as the unit itself.
MYTH: Renovations were completed by the previous owner, so I can’t claim them
BUSTED: It doesn’t matter if the works were undertaken by the previous owner. When you purchased the investment property you have also purchased the entitlement to claim depreciation on a of the property’s improvements. What they did with their assets, does not affect you and what you do with the same assets.
MYTH: Once I have spent money on an asset or capital work, I can claim it
BUSTED: Under Division 40, you can only start depreciating an asset once it has been “used or installed ready for use”. Not as soon as you have paid for the asset. For capital works under Division 43, you can claim deductions only once construction has been completed.
MYTH: More expensive items get higher depreciation
BUSTED: Low-value pooling applies to items in an investment property that have a value less than $1,000. Placing items in a low-value pool allows the owner to accelerate the rate of depreciation, increasing deductions earlier.
MYTH: All construction costs are eligible for depreciation
BUSTED: Not all construction costs are eligible. When claiming depreciation of a building, you are essentially only claiming what is there now. It is also important to note, you cannot claim demolition or site clearing.
BMT Tax Depreciation will show you how to claim more deductions, pay less tax and see a greater return on your investment property. BMT Tax Depreciation schedules are designed specifically for ease of use by accountants to incorporate depreciation deductions into an investors’ income tax assessment. All information is prepared in full compliance with ATO regulations, meaning that deductions are detailed and evidenced correctly in the event of an audit.
* Under new legislation outlined in the Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 passed by Parliament on 15 November 2017, investors who exchange contracts on a second-hand residential property after 7:30pm on 9 May 2017 will no longer be able to claim depreciation on previously used plant and equipment assets. Investors can claim deductions on plant and equipment assets they purchase and directly incur the expense for. Investors who purchased prior to this date and those who purchase a brand-new property will still be able to claim depreciation as they were previously.
To learn more, visit the BMT Tax Depreciation website or read BMT’s comprehensive White Paper. Alternatively, for obligation free advice contact the expert team at BMT Tax Depreciation on 1300 728 726.